Today, the Commerce Department released its report on the second quarter (Apr-Jun) gross domestic product. According to their numbers, the US economy contracted at a 1% clip (on an annual basis). In the first quarter, GDP contracted at 6.4%. A big improvement? Hmm, let's get past the headline. First and foremost, what is gross domestic product and can I buy it in my local supermarket.
GDP is one of the more widely measured and monitored calculations around the world. It measures the final value of goods and services produced by a country in a year. For you formula geeks, its private consumption + investment + government spending + (export-import). Now for you fans of my blog, you'll remember that consumer spending (consumption) makes up 2/3rds of the economy. Well for Q2, consumer spending fell by1.2%. With that fall, where was the improvement in the rest of the formula? Investment which measures what businesses buy for equipment and other investment in the business fell by 8.9%. Investment also measures what you and I do with buying a new or existing home fell by (yikes) 29.3%. Now, exports fell only by 7% (vs. 29% last quarter). The culprit there? That is the falling dollar making our goods cheaper for foreign buyers.
If I haven't bored you to death yet, the coup de grace, government spending was the stalwart in the quarter. Yes, our beloved government spending its stimulus money to prop up the economy. Some would say that if they didn't intervene we could be looking at a really bad quarter. I say that if the stimulus had more infrastructure spending and more of it spent in this year vs. next, we could be looking ok. We can argue about the spending in that stimulus program another time as there are many stories of waste as we speak (NEA - porn spending).
The government spending appears to have masked a really bad economy and a falling US dollar. While the headline would have you believe that the GDP result as better than expected, look deeper folks. Look deeper into any headline you read now. The spin doctors are out in force these days, making bad news look like honey. Have a good weekend! Cheers.
Friday, July 31, 2009
Wednesday, July 29, 2009
Nothing Happens in the Summer
Hello everyone. While the economy continues its struggles and the heat of the summer drones on, the news continues to remain hot, not cool. Usually, our beloved Congress is gearing up for a long vacation recess and not much is on the table. In my last post, I hinted that I would actually read the 1,000 page monstrosity of a health care reform bill. At this point, there is a lot of activity but not much to review yet. There are different versions of this bill in various committees. Why is this so important to you? This reform affects 1/6th of the economy, your healthcare plan now and in the future. We all know the status quo is not sustainable nor acceptable. But the alternatives are becoming unpalatable. One side of Congress believes an overhaul is required while the other side believes that we should fix the system step by step.
In some cases, I am afraid to go on vacation myself. Congress might sneak in a bill that hurts the country during the recess. Its happened before and doesn't mean it can't happen again. Meanwhile, there are many regulatory controls being bandied about in Congress and they don't get the same level of media coverage, which is a shame. I believe that more regulation is not the way to go. Putting in the right regulation and actual enforcement of that regulation is the best approach. Unfortunately, the regulations we have now didn't prevent the financial mess we are in now but the actual oversight of those regulations did.
Do you know that Fannie Mae and Freddie Mac hold 1/2 of all mortgages in the United States. How did they do that? Well, our beloved government allowed them to buy more mortgages and take greater risks. Your local mortgage broker and bank don't have the capital to offer unending supply of mortgages. The money comes from Fannie/Freddie who pays the local bank for the mortgages. Fannie/Freddie bundle these things up and sell them on the financial market. Vicious cycle when things are going down. But I digress...
While we are accustomed to nothing happening in August, don't fall asleep in that hammock! You might wake up to a universal health care plan that you didn't bargain for. Cheers!
In some cases, I am afraid to go on vacation myself. Congress might sneak in a bill that hurts the country during the recess. Its happened before and doesn't mean it can't happen again. Meanwhile, there are many regulatory controls being bandied about in Congress and they don't get the same level of media coverage, which is a shame. I believe that more regulation is not the way to go. Putting in the right regulation and actual enforcement of that regulation is the best approach. Unfortunately, the regulations we have now didn't prevent the financial mess we are in now but the actual oversight of those regulations did.
Do you know that Fannie Mae and Freddie Mac hold 1/2 of all mortgages in the United States. How did they do that? Well, our beloved government allowed them to buy more mortgages and take greater risks. Your local mortgage broker and bank don't have the capital to offer unending supply of mortgages. The money comes from Fannie/Freddie who pays the local bank for the mortgages. Fannie/Freddie bundle these things up and sell them on the financial market. Vicious cycle when things are going down. But I digress...
While we are accustomed to nothing happening in August, don't fall asleep in that hammock! You might wake up to a universal health care plan that you didn't bargain for. Cheers!
Wednesday, July 22, 2009
Hodgepodge
Hello everyone. My last post covered oil speculation and I had promised to cover more about the underlying supply and demand dynamics on this post. There is way too much to talk about and the oil price seems to be stuck in the $60-$75 range for now. Being out and about these days, the underlying concerns with people I visit seem to be about where the economy is going, what the government has been doing and their plans going forward.
The biggest news of the week is healthcare. I spoke about healthcare awhile ago before any plan was submitted. Well, the plans have been submitted and the Congressional Budget Office (a nonpartisan group in the Congress) said that the plans would add to our deficit woes. Deficit spending seems to be an American tradition. I could spend hours discussing the details of the plan but I think my main concern is the cost to us the taxpayer and to businesses. Tax the rich, a surtax in fact! Easy choice, but it won't pay for the plan. Tax businesses! Hmm, nice move but that hurts economic growth. I saw a statistic that 3/4 of all business are small ones. More to come on this as Congress is pushed into voting for a costly bill....
Last week, Henry Paulsen (the former Treasury Secretary) testified in front of Congressional panels investigating the Bank of America/Merrill Lynch merger/acquisition. As you recall, the CEO of BoA (Ken Lewis) said there was pressure from our government NOT to back out of the deal. Well, Mr. Paulsen admitted that. Where is the outrage on this? I guess people wanted the government to order people around last fall.
A watchdog for the TARP program postulated that the program along with other government bailout programs could cost $23.7 trillion before its all said and done. Wow. I think the estimate is high but even at $10 trillion, its a bit scary. Get the printing presses ready!
Again and again, the press is gloming onto more signs that the economy is turning around. I, frankly, don't see it yet. Until consumer spending comes back and the credit market continues to open, then we can talk. Foreclosures continue and people who have modified their mortgages still remain in trouble. I did notice one thing the other night, I saw that a 1969 Mustang Boss 429 model sold at auction for $195,000. People still have money but they aren't spending as readily as they did.
Stay tuned as I'll attempt to unravel the cost of the healthcare plan. I don't think we need more debate about actual reform provisions. Stay strong.
The biggest news of the week is healthcare. I spoke about healthcare awhile ago before any plan was submitted. Well, the plans have been submitted and the Congressional Budget Office (a nonpartisan group in the Congress) said that the plans would add to our deficit woes. Deficit spending seems to be an American tradition. I could spend hours discussing the details of the plan but I think my main concern is the cost to us the taxpayer and to businesses. Tax the rich, a surtax in fact! Easy choice, but it won't pay for the plan. Tax businesses! Hmm, nice move but that hurts economic growth. I saw a statistic that 3/4 of all business are small ones. More to come on this as Congress is pushed into voting for a costly bill....
Last week, Henry Paulsen (the former Treasury Secretary) testified in front of Congressional panels investigating the Bank of America/Merrill Lynch merger/acquisition. As you recall, the CEO of BoA (Ken Lewis) said there was pressure from our government NOT to back out of the deal. Well, Mr. Paulsen admitted that. Where is the outrage on this? I guess people wanted the government to order people around last fall.
A watchdog for the TARP program postulated that the program along with other government bailout programs could cost $23.7 trillion before its all said and done. Wow. I think the estimate is high but even at $10 trillion, its a bit scary. Get the printing presses ready!
Again and again, the press is gloming onto more signs that the economy is turning around. I, frankly, don't see it yet. Until consumer spending comes back and the credit market continues to open, then we can talk. Foreclosures continue and people who have modified their mortgages still remain in trouble. I did notice one thing the other night, I saw that a 1969 Mustang Boss 429 model sold at auction for $195,000. People still have money but they aren't spending as readily as they did.
Stay tuned as I'll attempt to unravel the cost of the healthcare plan. I don't think we need more debate about actual reform provisions. Stay strong.
Monday, July 13, 2009
Oil Speculation
Hello everyone. Its been awhile since I last made my post due to the holiday weekend and other more important endeavors. Last week, the CFTC and others have proposed some tougher restrictions on speculators in the energy sector commodities. This seems like an easy move. A move made to keep the dogs at bay in response to the run up of oil prices last year to $140 per barrel. On the surface, it looks and feels good.
Below the surface, it is emitting a foul odor. A lot of blame has been put at the feet of the speculator for the run up last year. I would also say that run up of prices was a temporary spike and feeling that the current supply/demand picture of oil was out of whack. Oil is a finite resource. Most of it has been drilled and a good chunk of it is coming from hostile and politically unstable countries. Nigeria is a prime example. How many times do you hear about stories of refineries being attacked? Its like a broken record, over and over again. On the demand side and what a large portion of our government wants to ignore is that China and India are growing very fast. That growth requires substantial amounts of energy. Even scarier is that a large portion of their populations don't own cars.
So what purpose does speculators have in the market? They are essentially the smaller third player in the market. There are the large index or hedge funds and on the other side is the commercial hedger booking their oil for future requirements. The speculator can drive markets but eventually, they don't have enough fire power to withstand the "strong hands", the funds and the commercials. For the layman, I could control 42,000 gallons of oil but simply putting up about $10,000 to buy a futures contract, which is tremendous leverage. Last summer, the market felt that given the demand and shrinking supply, the proper price for oil was $140 per barrel. Shortly after that, the economy began to tank and with that the speculators were wiped from the market. The price of oil plummented to $36 per barrel. We call this price discovery. Now the oil price has risen back up to the $60-$70 range but its not $140.
I feel there is always a need for some speculation in any market to allow another opinion on price just like there is in the stock market. The key question is toggling that leverage or margin to make it a bit more harder to manipulate the market the way it was last summer. Those hedge and index funds have lower margins than the speculator. Let's make them pony up some more funds to play in the game.
Stay tuned for next week's post as I'll delve more into oil, its supply and demand picture and how this hits your pocketbook/wallet. Cheers!
Below the surface, it is emitting a foul odor. A lot of blame has been put at the feet of the speculator for the run up last year. I would also say that run up of prices was a temporary spike and feeling that the current supply/demand picture of oil was out of whack. Oil is a finite resource. Most of it has been drilled and a good chunk of it is coming from hostile and politically unstable countries. Nigeria is a prime example. How many times do you hear about stories of refineries being attacked? Its like a broken record, over and over again. On the demand side and what a large portion of our government wants to ignore is that China and India are growing very fast. That growth requires substantial amounts of energy. Even scarier is that a large portion of their populations don't own cars.
So what purpose does speculators have in the market? They are essentially the smaller third player in the market. There are the large index or hedge funds and on the other side is the commercial hedger booking their oil for future requirements. The speculator can drive markets but eventually, they don't have enough fire power to withstand the "strong hands", the funds and the commercials. For the layman, I could control 42,000 gallons of oil but simply putting up about $10,000 to buy a futures contract, which is tremendous leverage. Last summer, the market felt that given the demand and shrinking supply, the proper price for oil was $140 per barrel. Shortly after that, the economy began to tank and with that the speculators were wiped from the market. The price of oil plummented to $36 per barrel. We call this price discovery. Now the oil price has risen back up to the $60-$70 range but its not $140.
I feel there is always a need for some speculation in any market to allow another opinion on price just like there is in the stock market. The key question is toggling that leverage or margin to make it a bit more harder to manipulate the market the way it was last summer. Those hedge and index funds have lower margins than the speculator. Let's make them pony up some more funds to play in the game.
Stay tuned for next week's post as I'll delve more into oil, its supply and demand picture and how this hits your pocketbook/wallet. Cheers!
Friday, July 3, 2009
Health Care: A privilege or a right?
Its been a quiet week for the average Joe. Most people have taken this week (or next) off for vacation. Not too many email responses lately. With Fourth of July tomorrow, most people would rather think of fireworks and BBQs than health care. For those history buffs, two of the key father figures in our country, John Adams and Thomas Jefferson both died on the Fourth of July on the 50th anniversary of the signing of the Declaration of Independence.
With the drafting of such a document, our fates were set in motion to be one of the most powerful countries on Earth. We also have tremendous liberties that many people in the world only dream of. I am thankful that I live in America and actually choose to remain. With all of our problems and shortcomings, we still have it really good. Now, for health care....
You have likely heard all the hoopla about health care on both sides of the argument. 40+ million of uninsured, soaring costs, soaring malpractice, yada yada. The big issues in Congress is the so-called public option, cost of the program and taxing people with health care benefits. These are not easy issues thus the reason why Clinton wasn't successful in the 90s going down this path. Some say we should move toward systems that Canada or Europe have. Those systems have their limitations and the quality of care has been questioned. If we can look at some numbers, of that 40+ million folks that don't have health care, there is approximately 10 million that are illegal aliens. Hmm, now we are in the 30 million range. Our current arrangements cover the poor (Medicaid) and the over 65 (Medicare). Of that 30 million, there are some folks who just won't pay for it. Now for affording it, that is debatable. I think a health care voucher or tax credit might be a better approach. What about the people who have it now? Well, I can say that even with health care, you don't go to the doctor or hospital for any wiff of disease or ailment. It does cost money and any argument that says people would use their health care willy nilly is hollow.
What is the big rush on this? The proponents say that it would help the economy in the long run. I don't believe it, yet. The key issue is who pays for it? All of us through the raising of taxes, the hopefully to be defeated cap and trade and taxing of health care benefits. The other underlying issue people tend to forget is that Obama's popularity is strong and with the majorities in the Congress, the time is now to get their programs through. If they don't do it this year, people might sour on the whole idea. I am soured on government thinking they can solve any problem. Having to deal with a sick mother, I can tell you first hand that government can't handle the programs in place now. Hmm, let's add another program that we can mismanage.
What does this have to do with finance? Its the cost. Health care costs will rise and so will your taxes. The other potential bad news is if there is an ability for citizens to pick a public health plan, how will your current insurer react? They will either jack up your deductibles or your premium to compete. If they can't compete, they will fail and in turn that reduces supply of payors. For the business owner, you will be put in a pickle with deciding on plans and the added costs of your premiums. What do I suggest? I suggest that there are better ways of fixing healthcare by focusing on tax credits, vouchers, malpractice law and looking at what states have healthcare now and improving it.
Have a Happy Fourth! Stay tuned as I'll focus back on the financial headlines of the day....
With the drafting of such a document, our fates were set in motion to be one of the most powerful countries on Earth. We also have tremendous liberties that many people in the world only dream of. I am thankful that I live in America and actually choose to remain. With all of our problems and shortcomings, we still have it really good. Now, for health care....
You have likely heard all the hoopla about health care on both sides of the argument. 40+ million of uninsured, soaring costs, soaring malpractice, yada yada. The big issues in Congress is the so-called public option, cost of the program and taxing people with health care benefits. These are not easy issues thus the reason why Clinton wasn't successful in the 90s going down this path. Some say we should move toward systems that Canada or Europe have. Those systems have their limitations and the quality of care has been questioned. If we can look at some numbers, of that 40+ million folks that don't have health care, there is approximately 10 million that are illegal aliens. Hmm, now we are in the 30 million range. Our current arrangements cover the poor (Medicaid) and the over 65 (Medicare). Of that 30 million, there are some folks who just won't pay for it. Now for affording it, that is debatable. I think a health care voucher or tax credit might be a better approach. What about the people who have it now? Well, I can say that even with health care, you don't go to the doctor or hospital for any wiff of disease or ailment. It does cost money and any argument that says people would use their health care willy nilly is hollow.
What is the big rush on this? The proponents say that it would help the economy in the long run. I don't believe it, yet. The key issue is who pays for it? All of us through the raising of taxes, the hopefully to be defeated cap and trade and taxing of health care benefits. The other underlying issue people tend to forget is that Obama's popularity is strong and with the majorities in the Congress, the time is now to get their programs through. If they don't do it this year, people might sour on the whole idea. I am soured on government thinking they can solve any problem. Having to deal with a sick mother, I can tell you first hand that government can't handle the programs in place now. Hmm, let's add another program that we can mismanage.
What does this have to do with finance? Its the cost. Health care costs will rise and so will your taxes. The other potential bad news is if there is an ability for citizens to pick a public health plan, how will your current insurer react? They will either jack up your deductibles or your premium to compete. If they can't compete, they will fail and in turn that reduces supply of payors. For the business owner, you will be put in a pickle with deciding on plans and the added costs of your premiums. What do I suggest? I suggest that there are better ways of fixing healthcare by focusing on tax credits, vouchers, malpractice law and looking at what states have healthcare now and improving it.
Have a Happy Fourth! Stay tuned as I'll focus back on the financial headlines of the day....
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